The Living Wage, Economic Efficiency, and Socio-Economic Wellbeing in a Competitive Market Economy

Abstract

Conventional economic wisdom views a Living Wage as costly in term of economic efficiency and competitiveness. I argue, based on x-efficiency theory, that higher wages need not cause any economic harm and can, on the contrary, generate higher levels of material wellbeing. Higher wages can be expected to induce x-efficiency and technological change cost offsets. In this context, an effective living wage, one that is above some subsistence minimum, can have a net efficiency effect on the economy. Therefore, a living wage greater than the wage rate generated by the free market cannot be predicted to generate economic harm. With the institutional parameters in place to realize a living wage, the economic pie can be expected to grow to accommodate the living wage.

Appendix

A Wal-Mart-Costco Vignette and the Living Wage Narrative

Some would argue that in a globalizing economic world it is increasingly difficult to avoid the Walmartization of the world without significant protection afforded to high wage and overall ‘good’ employers. This assumes that all firms have no choice but to behave like Wal-Mart and that Wal-Mart is in some sense a ‘bad’ corporation as a consequence of its relatively poor treatment of its labor forces and the communities in which its embedded.

First this argument assumes, without evidence, that mom and pop stores are more worker-friendly and community-friendly than Wal-Mart. In other words, one implicit counterfactual comparison to Wal-Mart is the small family owned and operated stores, some of which are driven into bankruptcy through competition with Wal-Mart. It also assumes that smaller stores can’t respond to Wal-Mart by developing competitive niche markets or producing more cost-competitively. This argument further assumes that worker-friendly firms can only produce at high unit cost (controlling for quality). With regards to the living wage narrative, an important question that must be asked is to what extent does Wal-Mart pay lower wages and provide fewer benefits than the traditional mom and pop type stores? Under which economic regime can workers earn an income that better approaches a living wage? (see Basker 2007, for an economic analysis of Wal-Mart).

On a larger note, the view that Wal-Mart’s organizational template is an economic imperative given by the forces of globalization fits nicely into the neoclassical worldview. The behavioral model presented here provides no such economic imperative. Also, the evidence contravenes the neoclassical worldview. In particular, the evidence from a Wal-Mart-Cosco comparison suggests that treating workers relatively well is competitive for the very reasons predicted by the behavioral model.

Costco pays employers much higher wages and greater benefits that does Wal-Mart. For example, on average, Costco, the fourth-largest U.S. retailer, paid fulltime employees an average hourly wage of $17, whereas Wal-Mart, the world’s largest retailer, paid $9.68, in the recent past. But in Costco labor turnover was 50% lower than in Wal-Mart and productivity was higher. However, Costco shareholders have not lost out from the better treatment of its employees as Costco’s returns have been better than that of Standard and Poor’s 500 average returns and better than Wal-Mart’s (Bary 2007; Graef 2005).

Costco’s higher wage and labor benefits approach to human resource management coinciding with relatively high rates of return and corporate growth is consistent with the causal explanations suggested by the behavioral model presented here. This model suggests multiple paths of corporate governance with no economic (market driven) imperative to any of the possible paths. The Costco-type path appears to be viable and sustainable, providing workers a higher level of material wellbeing.